Current and Future Trade Issues and Policies

1. Current and Future Trade Issues and Policies Robert B. Cassidy Senior Advisor International Trade and Services

2. Introduction • “May You Live in Interesting Times” • Doha Round • FTAs • Elephant in the Room • Legislative Prognosis: • Trade Promotion Authority (Fast Track) • China

3. DohaRound • Launched in November 2001, after failure to launch in Seattle in 1999. • Comprehensive: 21 issues for negotiations and discussions. Key topics: • Agriculture • Market access in industrial products • Implementation of past obligations • Services • Trade laws, IPR, capacity building • Infamous four “Singapore” issues: Investment, environment, competition policy, and trade facilitation

4. Missed Deadlines -- Cancun • Failure at Cancun – July 2003: • Four “Singapore Issues” • Developing countries opposed competition policy, environment and investment, and trade facilitation • Agriculture: No movement on “Modalities” • Not enough movement by the EU, US, and other rich nations • U.S. cotton subsidies • Industrial tariffs: Developing countries unwilling to make concessions unless significant liberalization in agricultural subsidies and market access • Developing countries now play a major role in the negotiations

5. Missed Deadlines: Hong Kong, 2005 • Ministers avoided making any commitments until others moved. • EU refused to improve its offer on Agricultural domestic subsidies and market access unless better market access offers in industrial products • U.S. prepared to improve its offer if EU and others were prepared to do the same • U.S. and developing countries believed the EU offer was insufficient and thus did not improve their offers. • Ministers focused on process rather than substance, pushing deadlines into 2006. • Substance more difficult to resolve: All the tough issues

6. July Ministerial Fails • July Geneva Ministerial failed to set firm modalities (formulas) for negotiating country-specific concessions • US puts improved offer on the table • EU does not come forward with improved offer • Developing countries do not improve agricultural market access offer (important to US) or industrial market access offers (important to EU and US) • India, Brazil and China did not improve offers • China actually arguing for developing countries to match their WTO accession rates

7. Time Running Out • Most concede that negotiations are over for the time being. • Trade promotion authority runs out in July 2007. • Not likely to complete negotiations by that timeframe. • USTR Schwab has been meeting with leaders in Asia and Latin America to determine whether negotiations can go forward • A mid-term election in November with likelihood that Democrats will win more seats in House and Senate. • Will the Administration seek to renew Trade Promotion Authority? • Likely to be a trade bill at least to pass Permanent Normal Trade Relations status for Vietnam • Doha Round Failure still leaves FTA negotiations

8. Concluded: NAFTA Israel Jordan Singapore Chile Australia Morocco Central American FTA including the Dominican Republic Bahrain Oman Under Negotiations Thailand South African Customs Union Andean Countries: Colombia, Peru and Ecuador Malaysia South Korea Panama Over 2/3rds of U.S. exports Over 50% of U.S. imports Ambitious Bilateral FTA Program

9. Regional FTA Negotiations • The broad regional FTAs have faltered as bilateral negotiations expanded: • The Free Trade Agreement of the Americas (FTAA) is stalled over Brazil refusal to negotiate an FTA that doesn’t cover agricultural subsidies • U.S. opposes because EU is the major offender • Asia Pacific Economic Cooperation (APEC) negotiations have stalled over unwillingness to move forward to Free Trade. • ASEAN initiative and Middle East initiative focus on bilateral FTAs in the region

10. Waning Support for Trade • CAFTA passed by 2 votes in the House • Only passed after Ways and Means Chairman Thomas passed a bill on China, a step he had said he would never take. • Peru and Colombia FTA legislation will be introduced after the mid-term election. Not clear about the outcome • Vietnam Permanent Normal Trade legislation will be introduced, probably before the President visits Vietnam for the APEC meetings in November • Doha failure represent a lack of support for trade liberalization in EU, developing countries and even the United States.

11. Elephant in the Room: China • Every country is focused on how to compete with China • Latin America, including Mexico, is loosing markets in the U.S. to China • ASEAN members are concerned about the loss of investment to China • China is importing more from Asia and assembling products for export to the United States • Canada is loosing manufacturing exports in central Canada to the US; commodity exports to China is the balance • EU countries along the southern rim face severe competition from China • U.S. manufacturing has still not replace 2 million jobs lost

12. What is Driving China’s Trade • Theories: • WTO accession? • China’s cheap Labor • Undervalued Currency • Out-sourcing – foreign direct investment • Closed Internal market that fuels exports

13. WTO Accession • WTO accession reduced Chinese tariffs and other Chinese barriers • Trading partners made no concessions since they were already applying their most favored nations treatment to China • China’s reduction of trade barriers did reduce costs since the duties on inputs were reduced. • A benefit but probably not large enough to account for the major increases in China’s exports

14. Cheap Labor • China’s wage rates have been rising and in some regions, labor, especially skilled labor, is in short supply. • Guangdong has higher wage rates, as does Beijing. • Chinese and foreign companies frequently have to hire more workers than necessary. • Other countries probably have lower wage rates now for the manufacturing sector. Vietnam the new target • Probably not the major reason for the expansion of China’s exports

15. Undervalued CurrencyEv • Everyone agrees: China’s currency is undervalued. • Undervaluation problem began in 1994 when China depreciated the yuan by 50%: Asian Financial Crisis • U.S. recession and WTO accession exacerbated the disparity • CCC: Section 301 petition based on violation of a trade agreement: WTO Subsidies Agreement and IMF • Mandatory retaliation • WTO Dispute Settlement • Dems in Congress file their own 301 • Dispute: The degree of undervaluation depends on the trade data

16. Chinese Trade Data Incorrect

17. Chinese Trade Data Incorrect

18. Effects of Undervalued Yuan • Chinese exports subsidized; imports taxed • Investment is cheap • Foreign exchange (F/X) increases • Money supply increases • Inflation increases • Free floating currencies bear the burden of adjustment: euro, Pound, C$

19. Enormous Increase in FDI

20. Foreign Direct Investment Flows to China

21. Is the Yuan Properly Valued? • Consensus that the Yuan is undervalued • International Organizations (IMF) • Administration Statements (Bush, Snow, Paulson, others) • Scholarly Research: including CRS • Only Dispute: Degree of undervaluation • 10%-75%, depending on data on exports/imports • Treasury and IMF: use Chinese data • CCC, others use trading partner data: reverse engineering

22. Estimates of Undervaluation

25. What Do We Do • Three approaches: • Jawboning: Treasury approach up to now • Yuan appreciates by 2.1% in July and further 1.2% since then • IMF Pressure: IMF sets up medium-term review of global imbalances • All countries’ measures put on the table • Domestic Legislation

26. Closed Internal Markets • What is the one issue I wish I could renegotiate: • Open China to China • 15-18% to distribute products within China • 4% in OECD • Keeps China’s economy an export driven economy

27. Legislative Agenda • Mid-term elections present uncertainties: • Trade issues not likely to be at center of election debates • Unclear whether democrats will be able to take control of house and/or senate • Even if Dems win either or both houses, not necessarily true that trade legislation is dead. Rangel is pro-trade but also support labor and environment issues in trade agreements • Likely to be a lame duck session. Trade legislation likely to be introduced but unclear what it will include. • Renewal of Generalized system of preferences • Miscellaneous tariff bill • Peru/Columbia? TPA authority?

28. China Legislation • Senators Schumer and Graham requested that China currency bill be taken up for a vote before adjournment • Promised a vote • Probably to help Secretary Paulson • Senator Grassley has currency bill: Doesn’t do much. • Senators Collins and other may introduce legislation allowing CVD investigations against undervalued currency • Prognosis: Passing legislation in one house is not sufficient. Allows elected officials to say they did something.